EU emissions trading in the buildings sector – an ex-ante assessment

The EU ETS is one of the first emissions trading schemes in the world and has contributed to the reduction of greenhouse gas emissions in the sectors covered by the scheme in recent years. The EU has adopted the introduction of a new, separate emissions trading scheme (ETS 2) for the buildings and transport sectors as well additional sectors. In our paper we estimate the impact of the new ETS 2 on the buildings sector. We calculate the greenhouse gas emission reduction in the year 2030 using an approach based on price elasticities. We further discuss the impact of the ETS 2 on cost-effectiveness of heat pump deployment in the EU Member States to outline an example of longer-term effects on investments. The results show that with a carbon price of 45 Euro per ton the impact ranges between three and seven Million tons of greenhouse gas emission reductions. Even with optimistic assumptions on the reaction of building owners, the overall contribution of the ETS 2 to meeting the EU target for reducing greenhouse gas emissions in the year 2030 is limited. The results furthermore show that the carbon price needed to make heat pumps competitive in the use phase differs largely between the Member States, where in three Member States the required level exceeds 100€/t CO2eq. We conclude that in addition to carbon pricing under the ETS 2, a strong policy framework is needed for the transition of the buildings sector.Key policy insights The new carbon pricing scheme in ETS 2 contributes to the reduction of greenhouse gas emissions in buildings in the EU, however its impact on the EU energy and climate targets for the year 2030 is limited.Carbon pricing supports the diffusion of heat pumps, however a price of 45 €/t is insufficient to make heat pumps competitive even in the operation phase in several countries.Due to the low price elasticities and the long investment cycles in the buildings sector, a strong policy mix is needed in addition to carbon pricing.